Analyse and rationalise: Understanding how to assess and optimise IT costs in a downturn market

The current economic situation is forcing executive teams to make tough decisions on spending and cost-cutting. This is particularly true when it comes to technology investment. The wider issues of knowing how to cut, how hard to cut and in a way that doesn’t cull capability (if that can be avoided) become even more pronounced where tech is concerned.

Cost-cutting on technology in this environment is very challenging. Tech budgets tend to grow annually as everything new is incremental to the cost base. And businesses need new technology as they look to remain competitive against new market entrants who can demonstrate greater agility as they don’t have legacy infrastructure issues to contend with.

Additionally, investors can become skittish during tough economic times and want guaranteed returns. So, cost optimisation on technology is in the spotlight – not least because technology spending will often be the single largest cost area for these organisations.

These organisations must establish a clear view of IT spending to identify opportunities for efficiency and cost-saving. Understanding the IT cost base and, consequentially, IT cost is only half the challenge.

Execution of cost reduction plans requires clear planning, business buy-in and a single-minded focus on the drive to get costs out.  Many organisations struggle to get full executive buy-in and can find their plans diluted and results disappointing.

Getting clarity on your IT cost base

To make cost reduction decisions on the existing tech cost base, CEOs, CTOs, and CFOs need clarity around the breakdown of tech spending across all key services – including what is critical and what is discretionary across all IT capabilities. They also need a candid picture of the commercial implications of their decisions. Without this clarity and transparency, decisions can seem arbitrary and ultimately may prove detrimental to the business's fortunes. 
 

This isn’t always easily achieved. Analysing the true technology costs across an organisation can be difficult due to reporting inconsistencies – even obscurity – around IT procurement spend, third-party digital service costs, the expense of shadow IT costs, and the division between operating and capital financing.

This needs to be addressed as the right level of analysis can reveal areas of potential overspending and levers for reduction. Based on our experience, this approach has resulted in cost reduction opportunities ranging from 5-20%.

Calculating your cost-to-serve

A key outcome of understanding the tech cost base is the ability to attribute costs to business products and services. This provides a technology ‘cost-to-serve’ for products and services, which may influence priorities and decisions based on the relative importance or income from these products/services. This greatly improves decision-making from a commercial perspective.

However, it’s not simple. Attributing tech costs in a structured, flexible and auditable way can only be carried out by having an end-to-end view of tech costs such that application, infrastructure, people, and third-party costs can be aligned to products and services, ensuring no overlap or gaps on an equitable basis.

This approach can uncover all IT costs that are often unreported across an organisation. Further analysis yields immediate cost reduction opportunities, whether removing duplicate or underutilised licensing, improving organisational structures or identifying and reducing discretionary spending and leakage.

A full cost-to-serve analysis can help:  

• Create efficiencies in hosting, licensing, and enterprise architecture
• Increase automation in a range of areas, from low-code services to workflow tools
• Consolidate corporate services and operations and reduce staffing costs
• Freeze-declining or stagnating services
• Take on third parties for new services with demand-led cost modelling.

Cost reduction execution

Execution of tech cost reduction change is not easy. It needs to be driven and supported from the top, be focused on measurable outcomes, and be wholly aligned to the business strategy. We have observed some consistent themes in these kinds of programmes:

• Execution of changes that will significantly reduce tech costs typically require executive support across the whole business, not just at CIO/CTO level. Decisions at the highest level will be required to consider and change priorities on investment projects, supplier service responsibilities and service levels, as well as sponsoring the adoption of new technologies across operational and business functions;
  
   
• Successful cost optimisation delivery nearly always requires changes to how technology is managed, governed, and structured. The technology management team needs to be capable of considering radical change to their sourcing models and delivery/run processes and structures;
  
   
• Cost efficiency in delivery must be balanced against the need to provide fast, flexible and innovative solutions to the business. There needs to be a forward view of what is important to the business in terms of speed, quality and risk, relative to tech delivery, which can be used to ensure target state technology capabilities are built fit for purpose;
  
   
• Many tech cost reduction initiatives involve changes to how, where and when third-party services are used to deliver services. Early engagement with suppliers to best align their expertise for value-driven arrangements will be required to ensure successful execution and transition from current arrangements;
  
   
• Delivery of change needs to meet business and economic deadlines – often, internal teams cannot easily execute this level of pace, executive engagement, and third-party expertise. Consideration of delivery partners who can do the job and are culturally aligned with the organisation is critical to delivery success.

Next up in our series:

Upcoming articles in our Technology Cost Optimisation series will cover:  

• Maximising ROI through App Rationalisation – Optimising Costs for Software Licenses and Subscriptions
• Designing an Efficient Tech Operating Model aligning Business and IT for Cost Optimisation
• Harnessing Emerging Technologies for Cost Optimisation – Automation, AI, and RPA
• From Strategy to Action: Implementing a Successful Technology Cost Optimisation Plan